MORGAN STANLEY: Korea Is The New Safe Haven

Charles Haynes
In a new report, Morgan Stanley identifies Korea as "the new safe haven" for investors:

From Crisis Prone to Increasingly Resilient: Korea has been in the eye of every economic storm we have seen in Asia over the last two decades. However, 2008 proved to be a watershed year, as regulations were implemented to foster stability in its economy. Whether compared with its own history or with that of other countries in AXJ, Korea now stands out as a safe haven for investors, especially amid global macro uncertainty.

Disciplined Investment and Healthy Corporate Balance Sheet: Korean corporates have turned more disciplined on capex since the Asian financial crisis in 1997. Lack of overinvestment means there should not be any overcapacity issues in the economy.

Not Externally Vulnerable Anymore: Korea is running a record-high current account surplus, supported by its strong export competitiveness. It has more than sufficient foreign reserves to cushion it against external liquidity shocks. It has also received the least amount of ''hot money' inflows in the region since 2009.

No Need to Worry about Asset Prices in Korea: Unlike the rest of the region, Korea is not seeing any risk of a property bubble. It is probably one of the very few economies in AXJ that could even see upside in its property prices in the next three years rather than the possible correction we may expect in other countries.

There Will Be No Policy Dilemma this Time: We believe the Bank of Korea will not be forced to hike interest rates this time as it did in 1997 and 2008. Its accommodative stance can remain in place for longer, in our view. Meanwhile, Korea's fiscal position remains solid, and local government debt is not yet an issue.

Despite the big vote of confidence in the Korean economy, Morgan Stanley economists Sharon Lam and Jason Liu say they are not ignoring the risks the country faces.

"Household leverage is high, but we think it is overstated - Korean household assets are also much stronger than before, and they did not participate in the QE liquidity party," write Lam and Liu in the report. "Korea has seen the largest amount of bond investment inflow in AXJ since 2008, but we are not worried about risk of massive unwinding, because foreign ownership is still low and we believe the holders are mainly long-term investors, not speculators."